Chapter 3

Income Tax: Bangladesh Context

Definition of Income tax
An income tax is a tax imposed on individuals or
entities (taxpayers) that varies with respective
income or profits (taxable income). Income tax
generally is computed as the product of a tax rate
times taxable income. Taxation rates may vary by
type or characteristics of the taxpayer.
Income tax ordinance, 1984 of section 16 provides
that Income tax is one which is imposed,
charged, payable and collected in relation to the
income of a person for income year/years, on
the basis of tax rate of the assessment year.
Characteristics of income tax: From the analysis of the
definition and nature of income tax, the following
characteristics can be identified –
• It is a direct tax.
• It is charged on the total income of a person.
• It is charged on the income of the income year at the rate
applicable in assessment year.
• It is payable in the year following the income year.
• It is generally charged on revenue income of a person.
• It is a tax charged on a person for income that comes within
the preview of relevant income tax law.
• Whether the income is permanent or temporary, it is
immaterial from the tax point of view. Even temporary
income is taxable.
• If a person receives tax free income on which tax is paid by
the person making payment on behalf of the recipient, it
has to be grossed up for inclusion in his total income.
Arguments for income tax are discussed below –
• It can be imposed on the basis of ability to pay. Thus
justice can maintain.
• Redistribution of income for social justice can be
ensured.
• As it is a direct tax it can be easily administered and
cost of administration become low.
• It ensures canon of certainty, thus budget estimates
in this regard become a reality.
• With a chance of rate quantum of revenue can be
increased or decreased.
• It can be used as an instrument of fiscal policy to
control and direct economy in the desired direction.
• It increases political consciousness.
• Arguments against income tax are discussed below –
• It is difficult to define income and some confusion always
remains there.
• In most of the cases, tax provisions are ambiguous and not
simplified one. As a result, taxpayers face difficulties.
• There are allegations about harassment of taxpayers by the
tax administration.
• Taxpayers in some cases remain hostile to the government
as payment is direct from his income and pocket.
• It gives rise to tax evasion and avoidance which are not
compatible with the discharge of civil responsibility.
• Maintenance of account and following rules becomes
difficult which can give rise to the arbitrary decision of the
tax officials.
• If the tax becomes high, it can be discourage saving,
investment and production.
Adverse impact of income tax
i) It can discourage savings. People may prefer
leisure than to extra work for income and
savings. It can thus adversely affect investment.
ii) Higher tax rate can indirectly lessen production
and encourage shifting of tax on production cost
thereby giving rise to higher cost of product.
iii) Progressive tax rate adversely affect capital
formation.
Thank You